Market Overview

More Trouble Ahead For China Real Estate ETF?

News that average property prices in 70 Chinese cities cooled for the first time since policymakers in the world's second-largest economy began a scorched-earth campaign two years ago to tame inflation may be a sign that China's blunt instruments to fight inflation are working.

That's the good news, but the bad news is investors may suffer if the Chinese real estate market cools too rapidly. For U.S. investors, the Guggenheim China Real Estate ETF (NYSE: TAO) has the potential to be the focal point of any negative sentiment on Chinese property values.

Since inception in late 2007, the Guggenheim China Real Estate ETF has been a risky bet. The ETF has plunged almost 42% in that time, but over the same time frame, the iShares FTSE China 25 Index Fund (NYSE: FXI) is up more than 40%.

More rough waters could be ahead for TAO. Price-cutting by developers has already led to sporadic protests and even vandalism by unhappy investors who have watched the value of their properties slip, according to the Wall Street Journal.

Year-to-date, TAO is already down more than 28% and it's chart is weak. More negative news flow could force it down to support at $12. Get below $12 and TAO could be trading at levels not seen since late 2008/early 2009.

Another strike against TAO is that it's basically a REIT ETF with a piddly dividend yield. Investors don't have to look far to find REIT ETFs with yields above 5%. TAO currently yields barely over 1% meaning investors are better off with U.S. Treasuries.

Chinese policymakers may like lower real estate prices. It curbs rampant speculation and flipping, but if prices fall too far too fast, officials may regret forcing prices lower in the first place. And TAO is going to follow those prices lower.

Bull case: It's hard to see it right now. A sharp bounce higher in the Chinese economy would be a boon for TAO, though we're not betting on it.

Bear case: China's economy falters and the government continues suppressing real estate values.

Posted-In: Long Ideas News Sector ETFs Short Ideas Dividends Wall Street Journal Emerging Market ETFs Technicals Best of Benzinga

 

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